Rating agencies may also take the conflict risk into account upon pondering potential downgrades. If – god forbid – EU leaders were to react in kind with equally careless comments about Italy‘s fiscal plans, the market damage could be substantial.

Di Maio has reportedly opined that French President Emmanuel Macron and German Chancellor Angela Merkel would like to bring down the current Italian government.

Such comments may go down well with parts of his domestic base during an election campaign. But they can backfire for a senior politician in office.

Loose lips cost Italy

What DiMaio overlooks is that stoking market concerns about a potential confrontation between Rome and the EU raises yields for Italian bonds, but not for French and German bonds.

It thus weakens Italy’s fiscal situation as well as, potentially even more significantly, its bargaining position in the coming EU discussions about the Italian budget.

Rating agencies may also take the conflict risk into account upon pondering potential downgrades. If – god forbid – EU leaders were to react in kind with equally careless comments about Italy‘s fiscal plans, the market damage could be substantial.

What Italy’s radical leaders fail to comprehend is that, with their expansive fiscal plans, they have provided fodder to the bond market vigilantes. Given Italy’s high level of accumulated debt, the budget plans are misguided, but probably not scary enough to trigger a genuine debt crisis now.

In such a touchy situation, communications matters a great deal. Careless talk by the top leaders in Rome could change already wary perceptions to a distinctly negative view and trigger a serious crisis soon.

According to Corriere della Sera, the populists may make a small concession to market pressure and the EU, reducing their deficit targets to 2.2% for 2020 and 2.0% for 2021. This would be down from their original plan of 2.4% for each of the next three years.

Self-defeating moves

Even with that small concession, the Lega/Five Star government’s plans would still clearly breach EU rules. Even though the country has performed rather well fiscally in the recent past, previous experience also tells us that Italy has a way of missing its planned deficit levels.

The net result of Italy’s planned fiscal stimulus for 2019, which on paper could be worth up to 0.8% of GDP, could be a higher fiscal deficit and a bigger debt burden without even any temporary boost to demand growth to show for it.

Even worse, the choice of partial reversals of pension and labor market reforms and the fiscal focus on additional social transfers, instead of pursuing pro-growth investment and tax cuts, will further weaken Italy’s meager rate of GDP trend growth.

This would be a most unfortunate outcome, given that Italy has made some serious progress under prime ministers Mario Monti, Matteo Renzi and Paolo Gentiloni.

Even though an Italian debt crisis is an accident waiting to happen, with economic growth of about 1% in 2018, a sizeable current account surplus of 2.8% of GDP and a bearable fiscal deficit of just 2% of GDP in 2018, Italy should not be a candidate for an immediate debt crisis.

Instead, its government should be able to get away with some modest fiscal slippage. However, if the radicals now ruling Rome really want to mimic the antics of Greece’s disastrous Yanis Varoufakis, all bets could be off.

If handled badly, the mix of a slowdown in growth, a noisy conflict with Brussels (and possibly Italy‘s own constitutional court) and some likely ratings downgrades could turn toxic.

The dust has a bit settled on Theresa May’s Brexit deal with the EU. It looks like that more people took the chance to read more of it and to compare it, for instance, with a no-deal that no one knows what exactly will mean